I’ve probably written about this topic for as long as the blog is up (March 2015) but I’d like to give you a summary of the most important parts of manufacturing overseas in this blog series on how to build a brand.
WARNING – LONG POST
So here goes:
Guide on Manufacturing Overseas
There are a lot of statistics I could give you but I wouldn’t know where to begin. I want to break down China and its manufacturing in a few sentences.
Believe it or not, China is still the biggest production site by far. While there are several countries in the vicinity, such as Vietnam, Thailand, and Bangladesh, they simply do not have the infrastructure that China does. Imagine you need sanitary items, furniture, household appliances, insurance, and a smart phone. You walk into a Wal-Mart. You can find practically anything you need in there and that’s within 10,000 square feet. That pretty much sums up China’s infrastructure.
Factory A provides plastic and tooling, Factory B provides packaging, Factory C provides raw material and components, and Factory D assembles everything. They are all within a stone’s throw away from each other.
Most of the factory bosses are related to each other. They set up a perfect system within their “community.”
I’ll give you an example, and I am not kidding you, 95% of the world’s supply of electrical multi-sockets comes from a small town in Cixi near Ningbo/Shanghai. When I say “small” I actually mean small for China.
There are over 1.4 million people in this town. When you step into “Ningbo Kaifeng” (World largest factory for electrical multisockets) you are overwhelmed. And when you step outside of the building you see five competitors across the street. All the factory bosses are related to each other. And down the street they can find everything they need – factories that make packaging, tooling, plastic, steel, and so on.
The Chinese are so effective in terms of production and infrastructure that some first world countries could really learn a lot.
The big retailers figured out a long time ago that nearly every large corporation, retailer, discounter, or online shop has a buying office somewhere in China/Hong Kong. I know this because I have been in the industry for over 17 years. When you walk into a factory and look at the production line you see cartons of goods with famous names on them. Whether it is a fan from Home Depot, an audio speaker from Target, or a ceramic pot from Bed, Bath, & Beyond, they were all made in China. Most products are made in specific areas.
Here are a few examples:
- Guangdong province (South of China): Electronics of any kind, especially consumer and household, toys
- Zhejiang province (Shanghai area): DIY products, tools, metal and fabrics, lighting
- Hebei province (Beijing area): Textiles, coal, steel, iron, engineering, chemicals, power, ceramics and food
These are the main areas for production. However, nowadays production is also shifting inland to take advantage of lower labor and production costs.
First things first. You need to understand that certifications are based on directives and legislations. So for example the GPSD in Europe (General Product Safety Directive Legislation) or the CPSC for the US (Consumer Products Safety Commission) says that a product needs to meet certain standards and need to be safe in general to import or bring to the market. Simple right? Unfortunately not. The GPSD has tons of directives under its belt such as the CE, RoHS, REACH directive). Which means that for each product or category there are further sub-categories that have directives which tell you exactly what your product needs to meet. Wait a minute, what exactly are you saying? I can’t read all this technical jargon….
Ever went onto Google to look what your product needs to meet under which directive? Found a site and then there’s a 200 page PDF that tells you in technical mumbo jumbo what the directive is about and after reading that you still don’t know what to do? Well this is where a lot of people struggle (I am actually working on a course as of writing this that will take the guesswork out and make you understand what you need to know)
So which certificates do I need and do I need them all?
Yes and No
The good news first. No you do not have to have all tests and certificates done by third party laboratories (both the US and Europe). What would suffice in (almost) all cases would be a declaration of conformity. Wow really? Yes, and here is the “however”. If you trust your suppliers blindly that all raw materials are free of hazardous chemicals, comply with electromagnetic compatibility (electronics for example) or meet certain other standards then that would be very foolish. If your supplier can’t provide any certification and claims that he complies with everything you ask for thats a huge red flag. I also understand that you don’t want to invest in any certification not knowing if it will sell. And this is the most important part where you as a entrepreneur and business person need to come to a decision. A) Is my product potentially dangerous (can it explode??). B) Is my product relatively simple and can’t harm anyone (e.g. leather wallet)? Once you’ve figured out what you need for your product you need to evaluate what should be invested. Lets take an example. For the sake of it lets look at a simple and a complicated product.
Solar powered garden light for 1.2$. Comes with nothing but a few cables, some plastic and a solar cell. Simple right? Technically I have to meet the following: LVD (EMC), ROHS, REACH & CE in general for Europe. Now if I were to test all of these the costs would amount to roughly 2000USD with a very cheap Chinese laboratory. If it was TUV or SGS the costs would be triple that. Now what if I am going to order 1,000 pieces and my testing costs would already cost more? That doesn’t make sense. In this case I suggest to get self declaration of the above regulations and save yourself these costs. Obviously you’d still want your supplier to declare that he can fulfil those requirements so look for suppliers who already deal with customers in the country you want to import to and have a good reputation or can back up their claim that the item is compliant with raw material certificates for example (from the raw material supplier).
Small Electric fan heater 5.9$. Comes also with a few cables, some plastic, a plug and a PCB. Simple right? No. You see, I need to plug this product into the socket (230Volts plus) and the potential dangers are very high. If the unit tips over or a child puts a cover on top, the entire unit can burn up (and the house with it). Also here technically I have to meet the following: LVD (EMC), ROHS, REACH & CE in general for Europe. Ideally I will also want a GS mark for Germany because this is a product consumers want to have with GS. On top of that I want abnormal testing from TUV for example. Abnormal testing means they would test what happens if you cover the unit with a blanket or if it tips over that the unit switches off automatically. A good supplier knows that there needs to be a tip over switch installed and overheating fuse included. This abnormal test alone costs 4-5,000USD. A GS mark costs somewhere in the same vicinity (2-4000US$). The other tests (LVD, RoHS, REACH & CE) are roughly 2,000USD. Now we are looking at 10-12,000USD investment costs. Would I do all these testings before purchasing? Yes, 1000%. I do not want to risk my business or anyone else’s life because I wanted cheap. You may say ok but I don’t have that kind of money. Then you need to find a supplier who either has these certificates already or is willing to invest the money for you. If you can’t find one then its simple – the product is not for you and your budget. You can still go for it without all the testing and certifications but I think we are on the same page here that that would be a very foolish decision in case anything happens.
Now I can’t go into hundreds of products or case studies here, that just isn’t possible. But I think you see my point. First I need to evaluate if the trouble is worth it and if I even want to deal with complicated products.
If the answer is yes then the strategy is pretty clear I think – test and get certificates. If you don’t dare to sell these risky (but profitable) products go the easy way and pick simple products or walk away.
Products & components to avoid when starting
Some items really don’t make sense to import (together with the antidumping rate items). These items are usually license-required items, large items or items that are manufactured in a low-income country near you.
China is getting some competition from a few countries, not only because of labor costs but also due to government import restrictions (antidumping fees for example).
Products that are difficult for importing:
- Anything related to gas
- Foods, drinks
- Guns, weaponry
- Hazardous material
- and more
For the above items you would need to obtain proper licenses first and this can be quite difficult. So the above might not be your first choice of import.
Contracts & Tooling Guide
A lot of people are concerned when they produce their own design in China that the supplier will copy it and sell to other sellers.
First I would like to point out that in my nearly 12 years in China I have had almost only good experiences with suppliers even with my own designs and exclusivity agreements.
Let’s look at your options and what it actually means to have NDA’s or Exclusivity Agreements in China and how likely it is to enforce it or hold up in a court.
Lets look at the terminology first and what they mean:
Whats an NDA and when do you use it?
An NDA or Non-Disclosure Agreement is used when you have your own product design and want that developed by a factory in China. You basically agree with the factory that they are not allowed to disclose, share or produce your design (or even ideas) with any other customer or supplier. Neither local or overseas. In most cases if you have your own design a tooling is likely need to be made. The first step you take before you send any designs to a factory is to ask them to sign the NDA.
To produce your design it is very likely that the factory needs to make a mould or tooling for you. With this tooling – parts of your product will be manufactured and eventually assembled into the final product.
(Categories like Textile or Food do not need tooling). Toolings are often included in the price quoted to you when you hand over your design. However you can also opt to pay for the tooling if you want to own the tooling as well.
Toolings can go anywhere from 1,000-30,000+USD depending on the size of the product. Yes, things can get pretty expensive.
Can I move my own tooling to a secure location?
Toolings are usually very large and heavy as they are made out of die-cast in most cases. Moving them requires quite some logistics.
So if you are unsure that your supplier is going to use them for other customers you should move them to a secure location (e.g. a rented warehouse). This can easily cost a few hundred US$.
And every time you would place an order this tooling needs to be moved to the factory and after production back to the warehouse. An expensive enterprise.
So having said all that if you feel you need to have your tooling secure somewhere else you should not work with this factory in the first place.
So whats the best way to go about having your own designs & tooling?
- You are just starting out and have no factory contacts whatsoever.
My tip is to work with a sourcing agent that can help you find reliable and trustworthy factories.
Don’t go onto Alibaba and randomly look for factories that could make your product. You don’t know them, they don’t know you and are unlikely to help you anyway.
Even if they tell you: “no problem, we can make it for you” they are likely to copy your product or sell the idea to other sellers the minute you place an order.
Just the other day a reader of mine told me he found a trading company on Alibaba for his design and placed an order of 300 pieces.
When he got contacted by the actual factory about labels and other things they needed from him he found out that the trading company placed a total of 500 pieces with that factory.
They ordered an additional 200 pieces (without the knowledge of the client & even with the clients logo) for themselves probably to sell it on Aliexpress or even Amazon themselves.
- You’ve been placing orders in China for a while.
Work with the factory of your trust. Even if the product you are now looking to manufacture doesn’t fit into their assortment. Factories have a large network and contacts with other factories.
Ask them to help you source a factory that can make your product whom they trust. I’d he happy to pay a few cents more for this type of help if it means I get connected to someone trustworthy.
Ideally your existing factory can help you manufacture your new design.
Mutual Exclusivity Agreement
Let say you find a product on Alibaba or at the shows and you want to buy this product exclusively to sell on Amazon. Suppliers are likely not to give you a Exclusivity Agreement if you don’t purchase high quantities from them or if you haven’t had any previous business with them. FBA sellers are in general very small customers for factories. The 1000 pieces (if even) you & I are going to want to place as a trial order cause more trouble to the factory than you could imagine. Setting up production and purchasing raw material for only a 1000 pieces is an expensive endeavour for factories. Most raw material suppliers have MOQ’s of 5000 pieces (per raw material) and up. So getting the material for 1000 pieces can be quite expensive. While some factories may have stock left of material or might agree to purchase the larger quantity from the raw material supplier in order to produce your order it is unlikely to happen in reality. Having said that you could approach things a little different to get your exclusivity:
You could ask the supplier to sign exclusivity agreements for 6 months. Meaning you could agree on a quantity that you will place within those 6 months and if you don’t reach the quantity the contract will be voided.
Which will give you the time to figure out if the product is selling and the supplier on the other hand isn’t forced to sign a deal for a long time.
After this period of 6 months the contract/agreement can be reviewed and extended for a longer period. Even if the supplier does not agree to an extension you have at least a head start of 6 months on other sellers.
Validity of agreements & contracts:
In the FB groups I often see question like: “How are those agreements going to hold up and what are your chances of winning an NDA dispute in China if you find out your supplier has betrayed you?”
Well to be honest the chances are slim. Does it help to have an agreement in Chinese? No. Even if you hire an expensive lawyer in China and win the case by the time you resolve the issue your expenses will have ballooned into thousands of $.
So unless you have a patent it isn’t even worth it pursuing a law suit.
You will also have difficulties finding out if your supplier actually used your tooling for another client. An un-trustworthy supplier will find many ways to wiggle himself out of the situation.
For example he could claim a disgruntled engineer of the company left the factory and took the designs to the next factory he started to work for. You won’t be able to proof him differently.
So whats the point of having an agreement at all and whats best approach?
To ask a supplier to sign an agreement or NDA shows that you mean serious business and they will take you and your project more seriously. If he doesn’t agree to it in the first place move on to the next supplier.
Work with a supplier whom you trust and have worked with for many months/years already. You will still need to have agreements in place with that supplier but the understanding is entirely different.
If you work with a supplier and you let him know he can grow his business with you over the years he will honour your agreement. The contract is more or less a formality.
Either place orders with a factory for ODM (products off the rack) in the beginning and eventually propose your ideas and designs after you worked with them for a while or hire a Sourcing Agent who can help you get you in touch with trustworthy factories.
For example in my case study I actually got exclusivity for my product (for an initial 1000 pieces order).
And the supplier honoured it. How do I know that? As you know my case study is public and people who join the course can see contacts of my supplier within the course.
After I launched my product and case study only a few days went by and my supplier contacted me to tell me that he had received quotation requests from 2 different US sellers already. Those 2 people wanted to copy my process (they even used my email templates and quotation forms that I offer in my course). The supplier refused to offer my product to those 2 guys. Thats not to say that they can’t go anywhere else but at least I know I have a reliable and trustworthy supplier.
So its all about finding the right supplier and develop a relationship with him. You will want to have agreements in place even after a long relationship but again, thats just really formality and if you found a trustworthy supplier they will honour agreements and in 95% of the cases help you if you have to claim money for example (defect or returned goods).
The point I want to get across to you is not to worry too much about getting copied in China if you approach things professionally.
Getting copied will happen eventually because either:
- Another factory copies/modifies the designs because they have seen it on Amazon.
- Your competitor copies your product or modifies it.
- Your approach was unprofessional.
Take the head-start that you have with your product and move on. Thats how this business is.
- Let someone help you professionally with sourcing and negotiating deals in China – or deal with factories that you trust and have business relationships with.
And remember the above goes only for your own designs. It is a different story if you are buying products off the rack maybe with small modifications from a supplier that you found on Alibaba for example. In these cases it doesn’t make much sense to have NDA’s or Exclusivity Agreements because it is not your design in the first place. It belongs to the supplier. However if you make significant modifications and are able to place larger orders it makes sense to have agreements.
Choosing a supplier
Most people start out on Alibaba because they cannot come to China. While I do recommend to come to China it doesn’t make sense if you are just starting out. If you are starting out, head over here to my Alibaba screencast which helps on choosing a supplier: http://importdojo.com/alibaba-hacks/
Ordering samples & how to test each sample effectively
I ll cover three topics about sample management:
- Sample costs
Once you have settled on a supplier for your new product it is time to purchase a sample. Most suppliers will charge you for sending a sample. There is usually no way around this unless you have worked with the supplier for a longer time.
Even for me, being here and dealing with suppliers on a daily basis I can’t guarantee that I don’t have to pay for a sample.
Here are some Insider tips to “try” to get a sample for free.
- Introduce yourself as an assistant of a large company. Suppliers tend to smell money when a large company is interested and are more likely to give away samples for free.
- State that if the sample is OK you will place a large order
- State that you have especially chosen this supplier to be your exclusive supplier for this product and he has the chance now to do business with you.
- Ask him to put the sample cost on top of the official order that may follow if the sample is what you are looking for.
- State that it is company policy that you/your company don’t pay for samples and if he wishes to do business he should agree to your sample terms.
- Split the costs. Offer to pay for either the samples or the freight costs.
If none of these work I recommend you to agree with the supplier to deduct the sample costs from the official (larger) order. At least this way you save the sample costs if you decide to order from this particular supplier.
Be wary of sample costs in general
On one occasion I was sourcing for a textile accessory. The item itself can be made for approx 2 USD.
I screened around 10 suppliers and eventually narrowed my selection down to 5 suppliers. They were all in a similar price range.
When it came down to ordering samples one of the suppliers (who was also the most expensive) asked me for a sample fee of 100 USD to be transferred to his bank account. That didn’t make sense. I immediately knew it must be a trading company with no factory background.
They probably outsource the work to a factory because they have no own facilities. Eliminate suppliers that have high sample costs right in the beginning.
Samples are usually 10-50% more expensive than the originally quoted price. It is a common practice to charge more for samples, as many of the samples need to be handmade for the customer, especially if you have some sort of modification request.
Another reason why samples are usually more expensive than the quoted price is that they want to see if you are serious & sincere about placing a larger order later.
I can tell you that from my own experience as a manufacturer. I get about 5 sample requests per week and all of them want it for free. If a buyer is not willing to pay for a sample I won’t send it to him because I will be thinking he just wants to get a sample and there will be no follow up order.
Sometimes suppliers have stock of their items. If you do not need to have any modifications done, or you just want to check the quality before asking for more, request a sample they have in stock. If they have stock, they usually charge the regular (MOQ) price.
In my 12 years living and working in China I have learned to communicate with Chinese suppliers in different ways compared to communicating with Western companies.
What is being said or promised on the phone/chat or email is not always being followed by the factory or the supplier. Often you will find that something you said or agreed on is being done completely different.
For example you ordered a sample of a certain product in a certain color & quantity but what you receive is completely different from what you asked/paid for.
Unfortunately the chain of command in factories is not always direct. So when your sales contact gives your sample order to his sample or engineering team there may be 2 or 3 people in between.
In between often some information gets lost. So eventually the person responsible for making your sample will receive different instructions that deviate from your original briefing. Often there will be no meetings held on projects from clients (like we are used to in the western world), but rather a quick email to another person that has not fully understood what you actually want or need.
Often there will be no message or notification that your project may be urgent or requires special attention. That might be a simple instruction, for example telling the sample team to make the sample with a US plug or adapter. No one has told the sample team and common sense is unfortunately not requested when being a worker in the factory.
Which brings us to:
I can’t stress enough how important it is to supervise & monitor your order/samples or other projects that you have with your supplier. Westerners work differently. We are more detailed and we expect people to have the same common sense that most of us have. Information will get lost. You need to plan for it.
After each discussion on the phone/chat or email you should follow up with written and agreed on-points. Try to think of everything for the supplier and make it as easy as possible for him to follow up & complete your instructions. Give him a “goodie” at the end of the email to advise him of the potential to be working with you.
For example (content in BLUE are my notes for you):
Thanks for the talk just now. I would like to summarize the discussed points:
– Sample to be sent to ……. (your address)
– Sample needs to be in working mode. A non-working sample is not accepted, as the sample will undergo quality tests by my third party laboratory. (this part doesn’t need to be true but he will think twice before sending you a sample in poor condition)
– Sample needs to have a US plug (attach him a picture of a US plug-make it easy for him)
– Please make sure the sample is tested on your side before being sent out.
– Please attach your model number & supplier name-tag to the sample as I am getting many samples and would like to know who sent which sample. (this way you will not lose reference of which supplier made your sample if you order from more than one)
– Make sure you mention “samples of no commercial value” to the Sample Invoice (in order to avoid customs tax on samples at your destination).
Please give me a written confirmation of all discussed points and your understanding.
If the sample works out well and everything is as it is agreed on, expect an order of… pcs.
Here a few more tips on communication & supervision with your supplier:
- Give deadlines to suppliers that you both agreed on.
- Set yourself reminders on your smart phone/computer that will help you to remind your supplier.
- Make simple sketches & drawings of your requests if the supplier misunderstands you.
- Have him confirm each step of your modification or request
- Keep emails clear and with bullet points to make your requests stand out
Once you have a feeling on what you need to pay attention to it gets a lot easier and your sample orders in China will be a lot smoother.
I’ve been saying this forever and I still see people shipping their products from China without inspecting their products by professionals but my recommendation is never ever ship without inspecting your goods.
Especially not if you ship directly to Amazon. If there’s a problem it’s too late to re-work the goods (in most cases) or ship back to China.
There are several third-party inspection companies in Asia. Some of the big names are: Buereau Veritas, TUV-SUD, TUV-RHEINLAND, and AsiaInspection (which I personally use) to name a few. The first three are usually expensive but also very thorough. AsiaInspection is a simple and cost efficient service that should work in the beginning for you. Register on their website and simply create an order with them. You can fill out all the details or even better ask your supplier to send them a sample.
Simple steps: You ask your supplier for a date when you can send an inspector (usually around 70-80% of the finished production), you book the inspection online and the Inspector will go to the factory on the arranged date.
Once the inspection is completed they will send you an inspection report. Based on this report you can either:
- Release the shipment to the supplier
- Ask the supplier to re-work the goods according to your agreed terms and fix problems found during the inspection
Only when you are entirely satisfied should you release the shipment. In most cases there will be minor findings, such as scratches, dents, or packaging issues. If this doesn’t bother you then release. If there are major problems like faulty wires or wrong colours, ask your supplier to re-work the goods.
Trust me, he will re-work, as he is still waiting to get the full payment. Remember, NEVER pay everything up front. Once everything is as it should be you can give your logistics provider the order to pick up the goods and send them to the port.
You are of course entitled to skip this process, but it is highly recommended, especially for first-timers and for order amounts above 1,000USD.
Pheeww that was a long post but I hope that this serves as a refreshment or reminder on what to pay attention to
Next week in our blog series we’ll talk about eCommerce, what channels exist, how to build an audience, social media following and more so stay tuned
If you enjoyed this post please comment or share on your social media
All the best and happy sourcing,